Values Lure Investors to Old Town Area of Estonia's Capital

TALLINN, Estonia — Picture a medieval town of merchants and Teutonic knights. A fortress stands above, with views of the Baltic Sea, and Gothic facades, reflecting their builders’ fortunes, spread out in its shadow. That was Tallinn, now the capital of Estonia, in the 13th century.

Hundreds of years later, the décor remains, although the knights are long gone. Now, it is mostly tourists who admire the cobblestone streets and colorful houses, many built when the town was an Eastern outpost of the Hanseatic League, an alliance of merchants trading in the Baltic and North seas region into the 17th century. Old Town, as the area of Tallinn is known, is a Unesco World Heritage Site, “exceptionally complete and well-preserved,” according to the United Nation’s cultural arm.

To Gustaf Hertsius and his family, Old Town is home. Mr. Hertsius, a public relations professional from Sweden, moved with his wife to the city in 2004. A year later, they purchased half of the 220-square-meter, or 2,368-square-foot, house they now fully own. The building dates to the 1600s and leans against the wall of the city’s fortress, Toompea Castle.

Renovations that began in January to turn the house into a single three-level residence are almost complete. The project, designed by Peter Sampson, a British architect based in Tallinn, has created rooms of different sizes and shapes, mostly dictated by the incline of the castle’s fortified wall, which is visible throughout the house.

The lounge, study, kitchen and four bedrooms, study, lounge and kitchen now have limestone walls and solid oak floors, in keeping with local tradition. Windows have been placed to maximize the natural light and views of the small courtyard.

In 2005, Mr. Hertsius purchased the first half of the house for about 2,000 euros, or $2,600, per square meter but the price for the rest had doubled by 2012, when he bought the second half. He figures that he will have spent about €100,000 on the renovation once it ends. But Mr. Hertsius considers the money well spent.

“The combination of ease of life, compact city living and beauty makes Tallinn very likeable,” he said. “As an entrepreneur, I appreciate that doing business is exceptionally easy with a very good business climate and a flat-rate tax system. This means that I can focus on business and not on unnecessary administration.”

Estonia, like its neighboring countries, suffered from the 2008 financial crisis. But in Tallinn last year, average prices per square meter for apartments were €1,257, not far off the 2008 average of about €1,400, according to data from the Estonian Land Board. (Estonia, in the European Union since 2004, adopted the euro in 2011. Older prices were converted from kroons, the former currency.) In Old Town, the average price per square meter last year was €2,793; it was about €3,200 in 2008.

Some agents say rental yields in the center city and Old Town areas can be as much as 6 percent a year. Old Town is a compact focal point for entertainment, nightlife and restaurants in this city of less than half a million inhabitants.

“You don’t actually need a car, you can walk everywhere,” said Mr. Sampson, the architect. “If you live in Old Town you probably never have to leave Old Town.”

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The Hertsius's home dates to the 1600s.CreditTerje Ugandi

During the short summer season, the streets and squares are filled with visitors from Finland, 50 miles across the Baltic, and tourists from the large cruise ships that dock in the nearby harbor.

According to Sveta Grun of Baltic Sotheby’s Realty, foreign real estate buyers come mostly from Finland and Russia. Many Russians still remember Tallinn as a gateway to the West during Estonia’s five decades as a Soviet republic, ending in 1991. For them, she said, it combines nostalgia with safe investment.

Tonu Palm, chief economist for Nordea Bank in Estonia, said by email that “for Russian investors, safety (investments in euro), geographical proximity, ability to do business in Russian language etc. certainly count.”

According to Mr. Palm, the current standoff between Russia and the West will not benefit investors or increase Estonia’s economic confidence.

“However,” he continued, “I don’t expect current headwinds to change the long-term trend for the real estate, which is going to be up,” but at a more moderate rate than in the past couple of years.

Ms. Grun said that in Old Town “what gives the value is heritage and history” and that “you can renovate, but there is no more free space” to build.

In the very heart of Old Town, a building at No.1 Kuninga St., with its tall decorated gable, is a fine example of the well-preserved late Gothic architecture, typical of the area. Land records list its earliest owner in 1339, according to a plaque on the wall.

On its first floor, a 182-square-meter apartment initally was listed with Baltic Sotheby’s at €875,000 but now offers are being sought. The property, a combination of two apartments, has ceilings 4.2 meters high and windows overlooking the cobblestone streets and the gray limestone tower of the Town Hall, a symbol of the city. The apartment was renovated 15 years ago, although some original features like wooden beams in the kitchen and limestone walls in the master bedroom were preserved.

Other parts of the city are developing too, and offer interesting residences. Nomme, a district south of the city center, is a geometric grid of large villas and old gardens, built in an old pine forest. To the north of Old Town and near the harbor, Kalamaaja is for the hipster crowd with its colorful wooden houses and trendy cafes and restaurants.

For investors, “I usually recommend to buy a studio, one-bedroom or two-bedroom apartment, the smaller the better,” said Gerdi Anupold of My Home, a local agency. Big spaces, she said, are rarely in demand as rentals.

Ms. Anupold’s agency has listed a 76-square-meter one bedroom apartment on Rataskaevu Street. This narrow winding road, dotted with restaurants and terraces, is a short walk from the steps that lead to Cathedral Hill, which dominates Old Town.

In the duplex apartment, a wooden staircase leads up from the living area and kitchen to the bedroom. Upstairs, there is natural light in all seasons through the skylights, as well as views of the red-tiled roofs of Old Town. The property, which has been a rental in recent years, is on the market for €240,000.